One of the oldest rules of personal finance is the simple admonition to pay yourself first. All the money books tell you to do it. All the personal finance blogs say it, too. Even your parents have given you the same advice.

But it’s hard. That money could be used someplace else. You could pay the phone bill, could pay down debt, could buy a new DVD player. You’ve tried once or twice in the past, but it’s so easy to forget. You don’t keep a budget, so when payday rolls around, the money just finds its way elsewhere.

And besides: What does “pay yourself first” even mean?

To pay yourself first means simply this: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account. The first bill you pay each month should be to yourself. This habit, developed early, can help you build tremendous wealth.

Why pay yourself first?

If you’re just getting started in the Real World, saving may seem impossible. You have rent, a car payment, groceries, and maybe student loans. Sure, you’d like to save, but there’s just no money left at the end of the month. And that’s the problem: Most people save what’s left over — left over after bills and after discretionary spending.

But if you don’t develop the saving habit now, there are always going to be reasons to delay: you need dental work, you want to go to Mexico with your friends, you aren’t making enough to pay your bills. Here are three reasons to start saving now instead of waiting until next year (or the year after):

You’re prioritizing saving

When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator — it’s empowering.

You’re developing good financial habits

Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you’re able to set the money aside before you rationalize reasons to spend it.

You’re prepared for money emergencies

By paying yourself first, you’re building a cash buffer with real-world applications. Regular steady contributions are an excellent way to build a nest egg. You can use the money to deal with emergencies. You can use it to purchase a house. You can use it to save for retirement. Paying yourself first gives you freedom — it opens a world of opportunity.

I’ve never met anyone who does not wish they had started saving earlier. Nobody tells themselves, “Saving was a mistake.” No matter what your age, begin saving now. And if you already save, consider boosting how much you set aside each month.

How to pay yourself first

The best way to develop a saving a habit is to make the process as painless as possible. Make it automatic. Make it invisible. If you arrange to have the money taken from your paycheck before you receive it, you’ll never know it’s missing.

Part of your savings plan will probably include retirement, but you should also save for intermediate goals too, such as buying a house, paying for a honeymoon, or purchasing a new car. Here are three easy ways to begin doing this yourself:

If your employer offers a retirement plan — such as a 401(k) — enroll as soon as possible, especially if the company matches your contributions. Matched contributions are like free money.

Starting a Roth IRA is one of the smartest moves a young adult can make. These accounts allow your investments to grow tax-free. Because of the extraordinary power of compound interest(and compound returns), regular investments in a Roth IRA from an early age can lead to enormous future wealth.

Open a high interest savings account at a bank like Capital One 360 or FNBO Direct. Set up automatic transfers into this account, either directly from your paycheck or from your regular bank account. Treat these transfers like you’d treat any other financial obligation. This should be your first and most important bill every month.

How to overcome the challenge of saving

The real barrier to developing this habit is finding the money to save. Many people believe it’s impossible. But almost everyone can save at least 1% of their income. That’s only one penny out of every dollar. Some will argue that saving this little is meaningless. But if a skeptic will try to save just 1% of his income, he’ll usually discover the process is painless. Maybe next he’ll try to save 3%. Or 5%. As his saving rate increases, so his nest egg will grow.

If you’re struggling to find money to save, consider setting aside your next raise for the future. As your income increases, set your gains aside for retirement and savings. Once you’re contributing the maximums to your retirement (and you’ve built emergency savings), you can begin to use your raises for yourself again. Sure, this means your effective salary will stagnate for a year or three or five. But it also means you’ll force yourself to develop the saving habit.

Example: My wife is a perfect case study. She started by having 8% of her pre-tax income set aside in her employer’s retirement plan. As her salary increased, she increased the amount she saved, routing it to various retirement accounts. Because she never saw the money in her paycheck, she never missed it. Now she saves 30% of her income, and she receives a 6% employer match! How did she do this? By paying herself first. (I should note that Kris just came to me the other night for advice on how to save even more. My wife is awesome.)

Further Reading

No matter what your age, you should make it a priority to develop a regular saving plan. Establishing this habit early can lead to increased financial security later in life. But even those of us who got a late start should do our best to pay ourselves first. I didn’t begin doing this until just a few years ago. Better late than never.

Though many personal finance books briefly explore the idea of paying yourself first, David Bach’s 2003 best-seller, The Automatic Millionaire is devoted exclusively to the subject. The entire book is a step-by-step guide to developing the saving habit and making it automatic. If you’d like more ideas about how to make this work in your life, this is the place to look. Any good public library will have a copy. Finally, here’s a recent Get Rich Slowly discussion about how much you should save for retirement.

Pay yourself first, my friends. It’s a habit that you will never regret.

Get Rich Slowly philosophy

This is the fourth of a fourteen-part series that explores my financial philosophy. These are the core tenets of Get Rich Slowly. Other parts include:

Look for a new installment in this series every Monday through the end of the year.

GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, and more.

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What a great article! I hope it sets non-saving readers onto a path of savings. That being said, I am a bit leery of paying myself “first”. This may sound like splitting hairs, but I feel that if you pay yourself first, you are setting a ceiling on how much you are going to save. What if, instead, you watched every single dollar like a hawk, curbed spending habits for a month, and basically avoided consumerism for a short time? When my wife and I did this, we found that we had over 50% of our take-home pay left at the end of the month! Before, we were plodding along at paying ourselves first with 10%, and then spreading the rest of our pay throughout the budget on both needs and wants. Again, probably splitting hairs to some people, but it made a PROFOUND difference in our lives. At this point, we are now saving over 60% of our take home pay, and feeling extremely satisfied.

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Samuel

You must have a plan for your future. That plan is saving money by paying yourself. Throughout your years the amount of your savings will increase slowly but tremendously.

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Autumn

Saving is a good habit to start. especially when you’re younger because your mindless about spending since most the time its your parents money. But once you get a job, you think more but all the money is still spent within a few days. Although, if we set aside money before we spend, we could eventually have enough money to buy a car instead of pressuring our parents.

It should actually be “Pay Your Investments First”. Sure savings is great, but you need to keep your money moving rather than being parked in a savings account. Over time your investments will pay for your luxuries.

First you need to take control of spending & track every single cent that comes in and out of your accounts. Its amazing how much excess spending you can cut back on by being stringent and tracking everything. At the end of the month, any additional cash thats left over, goes into savings & investment.

Than the next step is to be creative and look at ways of increasing income by adding additional income streams, be it a part time job, a part time business or selling items on EBay.

The same creativity can be applied to expenses & looking at ways of saving money.. making your lunch everyday, growing your own vegetables, getting rid of cable.

Any goal or outcome is achievable if you plan for it

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Vas

Always pay yourself first. You have worked hard for that money and it is yours. The rest can wait. Major companies follow this philosophy so why should we not.

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LaLaLand

Update. I have a job now (that pays 25% more and is 40 minutes closer). Although I’ll have lost two paychecks in between where I got my last paycheck and where I’ll be getting my next one, I haven’t skipped a single payment to myself and hope to give “myself” a 50% raise ;).

I wanted to add that I also like to think of “paying myself” as paying a bill. Light bill, car bill, Laura bill. I give myself a credit card allowance for each month that gets paid off monthly; I like to call it the envelope system for credit cards. If after bills/savings are paid and I don’t have enough left over to cover next month’s allowance (which I rarely spend anyways), then I cut that budget beforehand.

I ALWAYS KNOW HOW MUCH I CAN SPEND BEFORE I SPEND IT. Because of this I rarely, if ever need to take money out of savings. Believe me, this took so long for me to learn. I’ve never really saved short-term before (like for vacations, new clothes, etc etc.) because I just buy what I need and what I want with left over money in my checking after bills and savings are paid. And best of all it is GUILT FREE because it is pre-designated as “fun-money”. I also tend to be more particular about what I buy, and therefore tend to only get stuff I really love.

I personally save more with long-term, big-budget goals in mind (retirement, home improvements, paying off mortgage, paying off car, building substantial emergency funds, building investment funds). With my CC allowance method each month I can buy whatever semi-major thing I want, I just can’t buy more than the allowance for that month covers, and I have to wait until the next month if additional wants push me out of this month’s budget.

If I have a major expenditure coming my way (vacation or furniture) I underspend my CC allowance for a couple months until I’ve built up enough cash in checking to assure I can cover an inflated CC bill.

KNOW WHAT YOU HAVE TO WORK WITH AND WORK AROUND THAT. That is the key purpose of paying yourself first. You will be surprised what income you can adjust to and don’t feel shy about playing with that level until you reach a place that is both functional and enjoyable for you.

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LaLaLand

I just wanted to add that I do have a Roth IRA, just over 7k. I put $1000/year into it, but I couldn’t this year, I had to use that money towards my home down-payment. I don’t have a 401K yet, but the second I get a job, especially one that offers matching, I will fully fund it.

My future financial goals are to diversify my saving accounts. I currently only have my checking, my savings, and my ROTH. I’d like to start an e-fund, money market (to put extra money towards paying my mortgage off early). A 5 year CD ladder, and of course the 401k. I’d also like to be able to start a high-yield savings/investment accounts with about $500/year for my niece and 2 nephews.

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LaLaLand

This is just a personal story of how strong the psychological effect of teaching yourself to pay yourself first, can have.

I am a 25 year old single woman who was only making about 25k/year. I lost my job 1 month ago (2 months after purchasing my first house and 1 month after purchasing a car–after my very first and only car, a 10 year old Mazda I drove since high school, gave out 1wk and 1 day after closing on the house). For the first time since I was 16 I am living on no income (only my emergency funds), and with about $1,000/month more in bills than I had 3 months ago (and more monthly bills than I’ve ever had in my life).

Even after all of this, I can, at the least, afford to pay my mortgage, car, and bills for 3 more months. I’m a FTHB that bought a house in August and I’ll be getting an 8k tax credit about the time I would be running out of money (assuming I haven’t gotten a job by then.)

Although my funds are dwindling away I still pay my savings account that I’ve been building since I bought the house, every two weeks as if I were still getting a paycheck. The worst thing that could happen is I would need to use that money. The best thing that could happen is I get a job soon and now I have income again plus a still-growing savings account. Of course then my emergency savings will be a pile of poop by then but at least it’s a start.

I’ve learned my lesson though, EMERGENY FUNDS EMERGENCY FUNDS EMERGENCY FUNDS. Instead of using the 8k to pay off my car like I was intending, half of that sucker is going towards rebuilding a 6-12 month emergency fund. The only reason why I had the “emergency funds” is because the home I bought was a fixer-upper and I needed to have money left over. Fortunately I had my wits about me and was determined not to spend a cent of that money until I’d built my savings back up to at least a few months income. Unfortunately I was laid off before I could build my savings so my “house funds” became my “emergency funds” by default. Meh, so is life. BRING ON 2010!

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LM

JD I m glad that you use your wifes case as an example. I can reiterate what she is doing and know how powerful it can be out of my own experience. You can see the results I have had with this technique when applied consistently over more than a decade: http://www.wealth-steps.com/personal-finance-tip.html

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Your Roth IRA

Excellent advice, especially when it comes to putting away more of your income as you earn more. In fact, starting a business is good idea for a lot of people. I’m sure GetRichSlowly.org adds a bit to the bottom line each year which can be saved in a Roth IRA or high yield savings account. And a part-time business also allows owners to take tax deductions which leave money for investment. But, of course, pay yourself before you invest any resources in a part-time business!

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me

What’s the average high interest rate? …cause yearly inflation is 5% in USA…

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Alex

But should you save money first when it looks like you’re going to have to take out loans just to make ends meet? I’m in grad school on a $20,000 a year scholarship and my wife, just out of undergrad, was only able to find a stable job in her field with upward mobility at minimum wage. With school loans about to come due, we’re going to earn $1,100 per month (since my scholarship went to pay for health insurance this semester and is therefore all used up) and we’re going to owe around $1,700 per month. Shouldn’t any extra money, in this case, go towards paying off the additional loans that we’re about to incur due to me earning only, after paying for school, $7,000 per year and my wife earning below the poverty level?

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joruva

J.D., I notice you mention your wife’s automated savings and not your own. Does fluctuating income play a role in this?

I currently automate my finances heavily because I have a steady income. For those business owners and entrepreneurs out there, how do you automate your finances when you have fluctuating income? Just a larger cash cushion?

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FamilyOnABudget

In January of this year we maxed out our 401K contributions at work and have been adding a fixed amount to CD’s and our ING Account each month. I am surprised at how quickly the savings adds up.

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heironymous

Definitely wise advice. But also don’t forget that money isn’t the ultimate goal. You want to live a happy and well-adjusted life. That includes amazing vacations, splurging on fancy dinners and doing things on a regular basis that make you happy.

Just make sure you earn the money _first_ and then buy the pretty new gadget. (Speaking as an IT guy – cutting edge is bleeding edge – wait at least 6 monthes before buying new hw to run Windows 7)

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Paul in cAshburn

@Jon #37:
“Pay yourself first is really just shorthand for “spend much less than you make and bank the difference.” It requires some diligence but is self-reinforcing once you see the money grow.”
I think you’ve nailed it Jon. If a person or couple lives below their means, and saves the rest, they’ve got the concept right. The rest is just details. Important details (because you have to ensure you’re living the right amount beneath your means), but details nonetheless.
So, master the basic concepts, and live them, and then optimize as you see fit. There are many sources for different optimization strategies. Pick one that makes sense for you and yours, and go enjoy life!

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Wes

I work and she takes care of the house and our son. We don’t have any friends that are in even close to as good of a financial position as we are and they all make double or triple what we do. The secret to our success is sharing every aspect of our lives and making decisions together about what is best for us and our family. We don’t technically pay ourselves first: we agree on our priorities first, budget second and ultimately pay ourselves first and last with what is left.

All of those friends seem to have separate finances with totally different directions and priorities. Our multiple accounts are: House, College, Next House and Emergency rather than His or Hers and it has worked great for us. Don’t get me wrong- one of us (me) definitely has to be the aggressor/captain but it is still a team effort and we are a great team.

My apologies if this seems confrontational – just feel like there should be some positive contrast to the prevalent His and Hers comments here. There is a way to combine finances successfully and it is 99% communication.

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Jan

Those with a stay at home parent- make sure they “pay themselves” as well. There is nothing more frustrating than to see my dh’s account so much larger because HE was the one working outside of the home.
Match BOTH accounts for retirement. It will cause fewer problems when your marriage turns twenty.

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David

I think this is a point that is not mentioned enough.

When I was sinking deeper into debt, of course I was the only one I was paying. However, on the way out of debt, after I knew I was doing the best I could, I did pay myself first.

You have to to avoid going crazy. Plus, if you are at least sending your creditors something–they’ll be alright.

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Sassy

I have always paid myself first from my first after school job at 14. Then from the moment I had my first full time job at 18 I saved at least 10 and mostly more like 15% of my salary by direct deposit.

Because of this I have been able to travel all around Australia, take two years off work and live in Europe, buy an investment property and I am just about to buy a property for me to live in.

All because I paid myself first, so I knew what was left over after I paid my rent, bills etc, was mine to spend any way I like.

Has worked for me for over twenty years.

S

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Frugal Bachelor

@ Tyler

“How does a migrant farm worker apply this formula? He doesn’t make twice the amount of money necessary to survive.”

Try triple or quadruple. The money migrants workers are able to save would be shocking to a lot of people, and belies their outward appearance. People don’t risk their lives, and move far away from their friends and family, to enter America to lead a life a subsistence. They can do that back home. They come here to earn gobs of money (and send it home and/or save it).

The best stories of frugality today are where some guy arrived to the USA through the backroads, spends 5 years picking raspberries, and in doing so is able to save enough to pay cash for a nice house back home in Guatemala. Why aren’t these stories getting more attention in the personal finance press? People who have no labor skills, don’t speak the language, and were born in the wrong country have mastered the system, where as most people who are born here, live and die without ever figuring it out.

“How about a cardiac surgeon who earns $300k/year? He’s supposed to spend $150k/year on food, clothes, and housing?”

And so you have lifestyle inflation if you follow the 50% balanced money formula which JD advises. The more money you make, the farther you have fall should your income dry up, and your chance of suffering a big income drop is commensurate with your income. Going from the $300K/year lifestyle to a $100K/year lifestyle must be pretty rough if you’re spending 50% of what you earn. This formula may be applicable for people in sweet spot of maybe around $50K-$100K a year, but not outside of that.

Where frugality gets interesting is when you are earning like a cardiac surgeon, and saving/spending like a migrant farm worker.

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Kaley

Your rant has nothing to do with the article of Pay Yourself First. A surgeon who makes a lot of money doesn’t have to spend a lot there are a lot of rich people who save too they aren’t all going out there buying $150,000 cars. And your income comparison from a migrant worker and a surgeon is hilarious I know a few people who make minimum wage and refuse to go to sales, use coupons, etc… because they think it’s only for poor people yet they are poor because of their mindset anyone no matter what income can either be a great saver or a financial hole.

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Jon

I’m 33. Wife and I make 240k/ year. We should be living large, right? No way. We live as though we make maybe 65k/yr. Cars paid off, no debt. This has allowed us to save almost 300k in cash savings after all retirement vehicles funded.

Pay yourself first is really just shorthand for “spend much less than you make and bank the difference.” It requires some diligence but is self-reinforcing once you see the money grow.

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Generation Y Investor

I love the concept of paying yourself first. The idea that some people work… pay for taxes, bills, fun and then save what’s left doesn’t sound appealing to me. I work for myself… not the bank, credit card co’s or clothing store… therefore I pay myself first.

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Sunandshine

Every month, we save atleast 40-50% of our salary. Sure we have made mistakes and still make some but the habit to save never goes down. Its not a chore to save but we take fun in doing so:)

#19, Carol

We dont stop living because one day we are going to die. Similarly, people dont get married thinking that they will get divorced some day! Without trust, the institution of marriage won’t survive. Between me and my husband its not “my” or “his”money, its our money.

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MSM

Another good place to set aside money is in a Health Savings Account, if your health plan qualifies. With payroll deduction, the tax savings are similar to 401(k), you have the social security tax savings on top of the normal 401(k) tax savings and most banks offer nice interest rates and money market opportunities for Health Savings Accounts. Your money is accessible if you need it for health care out of pocket expenses.

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Greg

I tried doing the pay yourself last, I couldn’t get it to work. My left over money just stayed in my chequings account just in case. I do have a Canadian Savings Bond setup at work for an automatic withdrawal from each paycheck (up to $650 now), plus my work pays 5% of my salary into my RRSP, so I did have some automatic savings already.

But because of this post today I set up an automatic $25 withdraw every Monday into savings (for that $1000 emergency fund). It’s only 3% of my take home, but it’s a start. I also maximized my CPP and EI deductions, so that freed up $180 per month til the end of the year. Conveniently just in time for xmas.

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Walter

@ Tyler # 29

There are always going to be exceptions to any rule and or advice stream. One thing I have noticed about migrant workers is that very often they cohabitate with other migrant workers, such that their living arrangements are spread out among many. It allows them to save on rent and utilities as well as to ‘send money back home.’ So they may not have to have wages twice the subsistence level if the subsistance level is altered due to “unusual” living arrangements.

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Foxie | CarsxGirl

I think I’m pretty good at this, though it’s not exclusive for me… And I probably do need to save more, but I really don’t want to live like that much of a hermit and regret not living life to the fullest (that I can afford) while I’m young.

That said, last year I made a goal to save $1,000 towards retirement. I had that $1k in my Roth IRA, and have added $300 to it this year. I also signed up for my 401(k) this year, putting in 4% of my earnings and getting a dollar-for-dollar 4% company match. (Immediate vesting, too! I wish I had done it last year.) So far, I’m on track to contributing $1k to retirement this year, and may even exceed it! For the most part, it has been very painless as well, as the 401(k) contributions are gone before I even see how much I made.

I also set aside for emergencies, and I’m currently setting aside money to pay off my $2k car loan, which I should have enough to do by the end of the year. After that’s paid off, I’ll work on finishing up the project and move on to saving for the next car/project, tattoos, or any other expensive l’il thing I’d like. (A dSLR is high on my list, plus photography classes and things like that.)

Like others, I also pay myself last… Sweeping any unspent “spend” money into my car’s account for the big loan payoff. Sure, it might only be $8 left of my $35 “allowance,” but it all helps!

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Cath

We pay ourselves first, third, AND last. We have money taken out for 401k before we get the paycheck, then pay all the bills, including predetermined monthly contributions to our ING accounts, then leave the rest in checking as spending money. The day before the next paycheck, anything leftover in checking goes to ING.
We are about to tweak this plan a bit, however, to include a monthly “bill” to our Roth IRA’s as well.
We’ve saved quite a bit this way, and it is satisfying, not painful!

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Tyler Karaszewski

@Chett:
Any formula that allocates 50% of your income to needs only applies to people who make exactly twice a subsistence salary, does it not?

How does a migrant farm worker apply this formula? He doesn’t make twice the amount of money necessary to survive. How about a cardiac surgeon who earns $300k/year? He’s supposed to spend $150k/year on food, clothes, and housing?

Seems like a formula with less than general applicability, to me. In fact, the percentages seem quite arbitrary.

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Chett

J.D.

This post would have been a great time to remind readers of the balanced money formula from All Your Worth.

The great premise behind that mix of money management, (20% savings, 30% wants, and 50% needs) is, if you follow the 20% savings rule first, who cares what you do with your needs and wants. It’s really a matter of personal taste and levels of comfort after that.

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Tyler Karaszewski

This is one of my personal favorite financial fundamentals. If you combine it with “spend less than you earn” it makes the rest of personal finance *so easy*.

Here’s how I do it:

1) Pay yourself first. Have as much money as you’d like to save deducted automatically from your paycheck, or your bank account on the day you get paid.

2) Whatever is leftover is what you’ve “earned”. Don’t spend more than this.

That’s it. You can buy anything you want. You don’t have to budget at all. You come out ahead at the end of every month. If you have money in your checking account and you’ve already paid your bills for the month, go ahead and buy whatever you’d like. If you haven’t paid your bills, pay them. Whatever’s leftover is free money that you don’t need to keep track of. If you’re not sure how much your bills are going to cost, estimate high and don’t spend that money until you’ve received them and know how much they’ll be. Really, you can wait until after you get the electric bill to decide if you can afford a new iPod.

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Beth

@Rob Bennett — I like your perspective 🙂 I certainly wouldn’t contribute to my savings if it meant not being able to pay my bills. Simply avoiding late fees and interest charges provides a better return than most savings accounts right now!

I’m grateful that I can live below my means and make regular contributions to my savings, even if it isn’t a ton of money. I don’t consider these automatic payments as “paying myself first” because I’ve set goals and priorities. I guess the whole point is to make savings and investing a part of the financial plan, not an after thought.

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Brent

Always liked the pay yourself first. I myself do the 401K thing. But after the money goes into the bank I have done something I don’t think many do. I have a big plan that takes a fixed amount from every paycheck and allocates part or the whole to different things in order to achieve a goal by a certain date. I wrote down all my big money goals and when I wanted them by: stages of an E-fund, car savings, home improvement savings, PMI payoff, extra towards retirement. So Each payday I mark off that entry in the spreadsheet and I can see where I am on my plan. The plan actually goes out to 2011. Obviously If something goes wrong that plan might have to change, but for right now it keeps me on track with my long term goals in very concrete steps. If nothing else it is the motivator to save.

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JenK

I’ve never met anyone who does not wish they had started saving earlier.

Yes and no. My parents had created a trust account for me, which I could make deposits into but not withdrawals — at least not until I was 18. My parents could make withdrawals, however, and did, when they fell behind on their mortgage when I was 16. $600 of babysitting money GONE.

(After all, they needed it and I lived in the house too, right? **steam pours from ears**)

I CERTAINLY regretted saving that money at the time. If I hadn’t saved it, then at least *I* would’ve had the benefit of it.

A few months later I opened a new, individual account for myself. At a different bank. I didn’t tell my parents.

Years later, though, I was still dealing with the fear that any money I put in savings might disappear.

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Kimmo

I think it is very important to revisit these basic ideas, again and again. It’s easy to talk the talk, but not to…

On the ‘paying yourself first’ concept, however, I am currently having some doubts about its universal relevance. We just recently STOPPED paying ourselves first. The reasons come close Rob Bennett’s comment (#17).

A large portion of our current income is irregular. In the past we ‘paid ourselves first’ from our regular income, as well as from our irregular ones. As a result our regular income couldn’t cover our regular expenses and we had to supplement them from the irregular ones.

Paying ourselves first had of course its benefits: we managed to pay back our debts and build a reasonable emergency fund. But it also made budgeting and planning difficult, and it was also quite stressful.

Our current approach is to try to make our regular income cover our regular expenses. The savings will come from the irregular income.

We are yet to see if this works. However, I’m currently much more calm, because I now know that our regular expenses will be covered every month. So there is no desperate need to get extra income to fill in for the basic expenses. Funnily enough, it also makes me more motivated to do extra work, because I know that the income produced will build our savings rather that just be spent on everyday stuff.

(Note: We live in Finland and the concept of 401k’s and Roth IRAs and what-have-you don’t apply. The benefits from saving through these instruments are probably undisputable, as far as I understand the system.)

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Kris at GRS

Carol @#19-

While what you say is true, I don’t think that’s the point JD is trying to make. He’s not counting on my savings for himself; he’s counting on it for me. And it shows us that’s we’re working together for a stable financial future.

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Paul Williams @ Provident Planning

@Jimbo (#6):

The truth is that personal finance is not really that complicated. The reason you hear everyone giving similar advice over and over again is because it works. It’s not an easy fix and it’s not quick, but it will help you gain control of your finances and find success.

It’s not like science where you can do some research and possibly discover something that no one else has ever found.

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thisisbeth

Another “pay yourself first” is as soon as you pay off your car, continue making your car payment to a savings account. You’re used to not having that money anyway. Sadly, I didn’t hear that advice until long enough after I paid off my car, so I wasn’t able to painlessly do it (I’m working my way towards it now).

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Carol

[Sorry to be a wet blanket, but in an age when 1 of 2 marriages end in divorce… ]

With regard to the comment on your wife:”… Now she saves 30% of her income…My wife is awesome.”
I would like to take the opportunity to remind people that if they are married, their spouse’s money is not their money. If only your spouse’s signature is required to access that money, it can be moved around to different accounts, easily spent, etc., by all means you should still praise your spouse, but you should not count it as your personal wealth.

If your spouse and you put money into a joint account that requires both signatures for withdrawal, then it is safe to count that money as yours. In the event of a divorce, subtract 10% or more for legal fees from the total of joint accounts and take 50% from that remainder.
You should assume this even in a community property state because sometimes there is fraudulent behavior by 1 or more parties.

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BR

Im 24, and put 10% pretax into my 401k. In addition, my fiancee and I save somewhere between 30 and 35% of our “take home salary” (this is salary after taxes, 401k, and insurance). But, I hate the idea of pay yourself first. I would much rather keep the “extra” money in our checking account until the end of the month, and then transfer is to our online savings account. This makes sure all our bills are paid, and that we’ve been paid for the next month. Our savings amount always varies, but stays pretty high regardless.

We just bought our first house – using this savings plan for a downpayment. But we are now using this savings plan for a large downpayment on a car, and a hefty emergency fund in case one of us loses our job. Savings at this point in our lives is crucial – but it seems like there are too many expensive things to pay for (house, wedding, newish car for me, emergency fund, etc the list goes on)

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Rob Bennett

All the money books tell you to do it. All the personal finance blogs say it, too.

It’s not quite a 100 percent consensus, J.D. The title of Chapter Four of my book (Passion Saving) is “Pay Yourself Last.”

The suggestion implicit in the slogan “Pay Yourself First” is that saving is always better than spending. It is not so. The goal should not be to save. The goal should be to allocate your money to spending or saving effectively. The aim should be to save when that offers the best value proposition and to spend when that offers the best value proposition.

Why should the money go first to saving? Is saving really more important than paying the rent? Is saving more important than obtaining health insurance for your family? Is saving more important than having food to eat?

You suggest that no one ever regretted saving. Many people should regret saving. There are people who won’t go out to a restaurant lunch with a friend because it costs too much and who miss out on hearing about great job opportunities as a result (people often share such information in a relaxed setting and often only a restaurant meal does the trick). There are people who fail to get promotions because they are not willing to spend the money on clothes that would make them look like management material. There are people who perform poorly on their jobs because they won’t spend the money needed for a vacation that would recharge their batteries.

People fall for the line that saving is always best because it is certainly true that most of us spend more than we should. Most of us should indeed be saving more than we do. But that’s not because saving is inherently the better choice. It’s because we live in a marketing age and the benefits of saving are rarely marketed effectively.

I believe that people should determine their saving percentage only after having looked at all spending opportunities and having concluded that saving X amount offers the better long-term value proposition. That’s Paying Yourself Last, not First.

Rob

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Sheila

I wish I could find a “high interest” savings account. 🙂 At this point in my life, paying down my 5% mortgage is better than putting money in that elusive high interest savings account.

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RichHabits

Paying yourself first is the Key to being rich. I’ve read in many books like “Richest Man in Babylon”, “The automatic Millionare” and others. First, it did not make much sense in doing. But after repeated reading, I started doing it. It’s amazing to see the money growing. Today, I paying myself first at least 15% to 25%. Friends, it works. And like any habits, this is a habit, but a rich habit. This is the key to being rich.

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Oleg Mokhov

Hey JD,

The secret to a great, sturdy house is a rock-solid foundation.

And the secret to a great, wealth-building personal finance system is a solid foundation.

The solid foundation is saving ie. paying yourself. Would you put all your money into fancy furniture and rugs while skimping out on the actual foundation you build your house on? No. So why would you not prioritize your personal finance foundation as well? Pay yourself first.

Thanks for the solid reminder that paying ourselves first is personal finance priority number one,
Oleg

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Shane

I’m 22, making $38k

In January, I started a 401k putting 4%, with the 100% match, currently $2800.
I have $2k saved in an emergency fund, and recently started putting $750 per month in that to bring it to six months salary.
$6k saved for a house.
I also paid off all my revolving debt this year, including medical bills.
Now I’m starting to save up $3k to start up a Vanguard Roth IRA.
Once I get a house, I’m going to concentrate on my student loans to try and knock them out within 5 years.

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Rex Huston

The biggest roadblock to becoming wealthy is living like you are wealthy before you really are. By paying yourself first, you take away the temptation to spend. If you don’t have any money burning a hole in your pocket, you wont be able to waste it on frivolous stuff. High interest savings accounts, ROTHS / IRAS and 401ks are a great way to pay yourself first. Great Post!

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Todd @ Personal Finance Playbook

I totally agree with this as a tenet for personal finance. I would be wary of some of the numbers used by Bach though. He sometimes disregards inflation in telling you how much you’ll end up with and assumes very high interest rates 10-12%, which he calls the historical return of the stock market.

Most people, including Warren Buffett, doesn’t think it’s reasonable to expect that kind of return, even including dividends (and the dividend landscape has changed dramatically in the last 20 years). Just something to keep in mind.

Still paying yourself first, and making it automatic, is a vital tool for saving and building wealth.

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Brenda

Saving through a 401(k) is a really painless way to do it. Even for low-income earners. You don’t even miss that extra $20 out of your $200 paycheck, because it’s taken out before taxes. So it doesn’t FEEL like a whole $20 is absent. Anyone who has access to a 401(k) should open one for themselves. Saying “I don’t make enough” is no excuse at all. If I can do it, ANYONE can do it.

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Laura in Atlanta

Paying yourself first is indeed the way to go. And truly, you dont miss it!

I make $47500/year and I’m single.
10% goes to a 403B through work
6% goes to TIAACREFF through work (and 3% is matched)
$5000/year goes to a ROTH IRA
$6000/year ($1000 every other month) goes to a ladder of 1 year CDs for Long Term Savings

The hardest part I have on my savings strategy is making sure I can do the contributions to the Long Term Savings plan and I occasionally faulter, having to skip a month about once a year. I dont want to live like a hermit afterall! But overall it does feel so good to have this money socked away and it *can* be done, if you do it automatically!

Thanks again JD for a great article!

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Funny about Money

Well, “tremendous wealth” might be a bit of an overstatement. But it is surprising how quickly even a small monthly set-aside adds up.

By the time the Great Desert University quit docking our pay with furlough days, I had learned to live on $500/month less than my alleged actual salary. So when the furloughs ended, I started putting the amount of the “increase” back to my former salary into savings.

You also can increase contributions by putting the amount of loan payments into savings as you pay off debt. Obviously, if you can afford $300 or $500 a month for a car loan, you don’t need the money to live on.

Truth to tell, the only way to build credible wealth by paying yourself is to earn more money. What really goosed my savings was getting a second job and putting all the net income from it directly into savings.

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Little House

It’s so true that the longer you wait to establish this habit, the tougher it gets to begin it. I’m still struggling with the “pay yourself first” or put some money into savings before paying the bills.

This past year my husband had a bit of luck with his business and we were able to save some the additional income that came in. Now, he is back to his normal income and it’s much tougher to do.

At least this month I set aside a small amount. I have lofty savings goals for the next six months, so I think I’ll have to look into an automatic transfer from my checking to my savings to get these accomplished.

thanks for the reminder!
Little House

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Jimbo

The PF blogsphere is slowly becoming useless with every blogger peddling the same advice. I guess there’s only so much about PF you can talk about…

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Kaley

It may only seem useless to you because you don’t follow the advice PF Blogs are an amazing resource maybe you should start following the advice.

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ABCs of Investing

Funny, I was just thinking the other day that the whole idea of “pay yourself first” is mis-named a bit.

It should be called something like “make saving a high(er) priority”.

Typically people will try to save whatever is left over after their normal spending which means the saving aspect is the lowest priority. Putting it first just makes it a higher priority.

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Sam

We pay ourselves first via the 401K at work so we never see that money in our pay check and then we pay ourselves first again by directing money to both long term and short term savings goals (via auto transfer to ING). Although we see the money that goes to ING we don’t count it as part of our available funds.

Paying yourself first also helps you to be more adaptable. If you are nearing the end of the month and you are running out of money, you will find a way to cut expenses or generate more income.

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Writers Coin

Like you said, getting started is the toughest part. I started by setting aside $50 a month to my ING account. It didn’t feel like much, but it was basically a night of going out to dinner and drinks, so it was easy to “find the money.”

As time passes and you get a better handle on things, that number will go up.

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Beth @ Smart Family Tips

I recently learned a lesson about saving money from pay raises. I’ve often heard that advice, but never seemed to be able to do it. The lure of “extra” money was too great — I thought about additional monthly expenses that it would cover, or the extra things we could buy.

However, as a result of the economic downturn, my employer stopped all raises for this year, and likely next year as well. (I do realize I’m incredibly fortunate to still have a job and fortunate that I didn’t have to take a pay cut). What I’ve learned is that while the missing raise is a psychological bummer, financially, we haven’t missed it at all.

As J.D. points out, we were used to living on the income without the raise. We’ve not lost anything. If my employer does resume giving raises, it will be much easier for me to bank the “extra” money rather than spend it.

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Jim Wang

When I was working, most of my raises were relatively small anyway. 3% raise on a $60,000 salary is just $1,800. $1,800 isn’t anything to scoff at but it’s about a $100 more a month… as a single guy, $100 more a month isn’t going to impact my lifestyle. I was better off putting that into my retirement savings so I could reap the benefits down the road.

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